WASHINGTON - Moody's Investors Service lowered its rating on Richmond general obligation bonds to A1 from Aa to reflect the city's continuing trends of slow economic and revenue growth and modest financial margins, in its first ratings move on the credit since 1970.

The downgrade occurred after the city council failed two weeks ago to make provisions in the fiscal 1995 budget to add reserves to Richmond's general fund balance.

The council discontinued a policy it had adopted in October 1992 that called for a buildup of undesignated fund reserves to 5% from 3% from fiscal 1994 to 1997, said Edward Krauss, a vice president in Moody's public finance department.

The policy called for adding equal annual increments of $2 million to the fund during this period. Discontinuing the policy means "the political will and financial ability of the city to reach its fund balance goal is now uncertain," Krauss said.

The downgrade will raise the cost to Richmond of a planned June 7 competitive sale of $4.9 million of general obligation, unlimited tax bonds. With this issue, the city's outstanding general obligation debt will total $629 million, Krauss said.

Proceeds from the sale will be used to make an annual reimbursement to the general fund for equipment purchases in fiscal 1994, which ends June 30.

The city has experienced budgetary pressures for "a number of years," and the council's decision to cut the financial reserve buildup "completes the picture for us," Krauss said. The council instead cut property tax rates, which are about 25% higher than in neighboring suburbs, and increased spending for certain basic services, he said.

"We have worked diligently" to maintain the Aa rating, said Max Bohnstedt, director of finance for the city. But "the service demands of the city and the region have escalated, and... our tax base, like all central cities', has been diminishing, and ... you get a crossover point where the pressure becomes more than the standards of a double-A can maintain," he said.

Among the factors limiting the city's longer-term financial flexibility is an ongoing population decline that has occurred over the past two decades, Krauss said. In addition, the level of residents' wealth has not kept pace with the state or the country, he said in a statement, noting that more than one-fifth of residents have below-poverty income levels.

"The city is being continually challenged to deal with the impact of these population shifts, as well as growth in the retail and commercial employment base that has developed in neighboring suburbs over the last decade," Krauss said. Richmond's attempts to stimulate retail and commercial activity have failed to reverse these trends, resulting in slow tax base growth and higher-than-average unemployment, he said.

"We still view Richmond as a significant regional city. Its importance from that standpoint has not diminished," Krauss said. "It is still a major financial and institutional center, both for the region and central Virginia," Richmond "continues to exert strong expenditure controls," Krauss said. Since 1991, the city has eliminated about 10% of budgeted employee positions supported by the general fund and it has adopted mid-year spending cuts to offset revenue shortfalls, he said.

Richmond began fiscal 1994 with $12.7 million in its general fund. With the fiscal 1994 increase in its undesignated fund balance, the city projects a $14.7 million general fund balance by June 30, Bohnstedt said. The next scheduled increment of $2 million, canceled by the council, would have brought the fund to $16.7 million in fiscal 1995, he said.

Richmond is rated AA by Standard & Poor's Corp., which upgraded the rating from AA-minus in 1989. Fitch Investors Service does not rate the city.

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